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VeryOldMan

Correcting Funding Deficiency

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I have a DB plan ( not Cash Balance) that was terminated this year and has a funding deficiency. Since this would be the final SB filed for the plan, I am unclear how to show the correction of the deficiency on the SB since instructions say to report only contributions made with 8 1/2 post yr end.  The minimum contribution was due 9-15-19 but wasn't funded until 11-15-19. The contribution made was adjusted for interest using the effective interest rate for 2019 and the deficiency corrected. We are wondering whether to un-terminate for 2019 so a clean and final SB could be filed for 2020. Client is concerned about the audit risk.

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I think you would just show the funding deficiency.  If the plan was terminated before YE, then no additional SB is required.  

You could report on the 5330 that the payment has been made.  The "audit risk" is in the reported funded deficiency.  If they audit, that is when you would show them it was paid.

I think some people just pay the 10% excise tax, and never actually correct the deficiency.  If you don't have the cash, terminating the plan allows you to walk away from the final contribution for 10 cents on the dollar.

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Really? If the FD isn't corrected by depositing the additional amount,  doesn't the tax jump to 100% of the deficiency under 4971(b)? But just to discuss the point, you are saying I think that whether I postpone the termination and final a SB for 2020 showing the deficiency paid, I would still have the same audit risk. I find that surprising.

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3 hours ago, John Feldt ERPA CPC QPA said:

My understanding is that any funding deficiency reported on the SB automatically puts the plan on the “please audit me” list for the IRS to consider. Not all get audited, of course. 

We have had experience consistent with your understanding, John Feldt.

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21 hours ago, Luke Bailey said:

We have had experience consistent with your understanding, John Feldt.

Luke, is your experience in this instance with large or small plans? And did a prompt correction reduce the audit risk?

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VeryOldMan, my comment went to the "not all are audited" part of John Feldt's statement. The experience I had was with a small plan, and it led me to suspect that there may at least in some cases be a gap between the draconian nature of the minimum funding excise tax provision and the IRS's zeal to enforce, e.g. in the case of a small plan termination where issues of financial fairness/solvency can be raised. The correspondence from Service Center was pretty prompt, however.

Of course, in an appropriate situation the "non-EPCRS" employee plans closing group could be approached. They have authority to waive excise taxes, although they are typically loath to do so.

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I googled the subject of the 100% excise tax and found an article by Jim Holland from 3/15/2018 that discusses this.  Basically there may be a couple of possible ways of seeking a waiver of the 100% tax, but nothing is certain and one approach is very expensive.  But nothing happens automatically so this would remain a lingering issue without a reasonable amount of effort and/or expense.

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Note (and this may or may not be covered in Jim Holland's article) that there is also an issue about the way it is calculated. There is some guidance (I think a TAM, maybe) that arguably is a strict reading of the statute, but is surprisingly punitive and makes you wonder whether it is what Congress really had in mind.

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